FSA fails to reach 16th birthday as crisis spoils teenage years

FSA was created in 1997 following 1990s fraud cases

The U.K. Financial Services Authority will be swept away next week after nearly 16 years, replaced by two new regulators with greater powers to intrude into banks’ business models, ban sales of financial products and name and shame suspects.

The Financial Conduct Authority in London will carry on the bulk of the consumer work of the FSA starting Monday. The Prudential Regulation Authority, which will be a unit of the Bank of England under incoming Governor Mark Carney, will be responsible for the stability of the banking industry.

The FSA, the brainchild of then-Chancellor of the Exchequer Gordon Brown, was created in 1997 after scandals in the 1990s such as fraud cases at Barings Plc and Bank of Credit & Commerce International dented confidence in London’s finance industry. The scandals of the 2008 credit crunch undid the FSA, however, as lawmakers criticized the regulator for failing to prevent the rescues of Northern Rock Plc, Royal Bank of Scotland Plc and Lloyds Banking Group Plc.

“The old line was that the FSA wasn’t there to second- guess,” said Carlos Conceicao, the former head of the watchdog’s wholesale enforcement division and now a partner at Clifford Chance LLP in London. “Now it’s the regulator in the boardroom. It’s a very different ethos, and if you’re going down that interventionist route it relies on the people who are doing those interventions'' being properly informed.

George Osborne, now the Chancellor of the Exchequer, pledged to retire the FSA in 2010 as part of the campaign to unseat Brown's Labour party. As part of his overhaul, the FCA will have powers to quickly ban risky products, intervene in marketing and publish information on investigations before they result in charges or a settlement.

Libor Probe

The FCA, which is taking the FSA’s headquarters in Canary Wharf with around 2,800 employees, will be in charge of the old agency’s high-profile investigation into the rigging of benchmark interest rates such as Libor. Financial regulators in the U.K. and the U.S. have already imposed more than $2.5 billion in fines on Barclays Plc, UBS AG and RBS and more banks are under investigation.

“The FCA wants to be perceived as a regulator that is swift to act, so it’s unlikely to backtrack on the aggressive stance adopted recently by the FSA,” said Arnondo Chakrabarti, a lawyer at Allen & Overy LLP in London. “There is a danger that if they become too aggressive they jeopardize working relationships with the banks in a way that proves to be detrimental to their goals.”

BOE Adjacent

The PRA, which will be based in the City of London in the former headquarters of broker JP Morgan Cazenove Ltd., close to the Bank of England, will be responsible for setting capital, liquidity and bonus rules, and oversee the stability of the banking and insurance industries. Andrew Bailey, the last chief executive officer of the FSA, will run the PRA and oversee about 1,100 people.

Bailey has promised to intervene in potential banking crises earlier and allow lenders to fail in an orderly manner. The PRA will keep a “very close eye on banks,” and require them “to have very clear lending policies,” Bailey said in a video interview on the Bank of England’s website.

The Bank of England’s Financial Policy Committee, which has been operating on an interim basis since 2011, will also be established on April 1. Osborne this week named former London Stock Exchange CEO Clara Furse as an external member of the panel. Donald Kohn, Martin Taylor and ex-Goldman Sachs executive Richard Sharp were also appointed.

Carney in Charge

The financial-supervisory role is one of a series of changes at the three-century-old Bank of England this year. In addition to sweeping new powers, Osborne has revamped its inflation-targeting remit to give it more flexibility to provide support to the economy. It is also preparing to welcome Carney, who will become the first foreigner to lead the institution when he succeeds Mervyn King in July.

Even with the greater powers being given to the Bank of England to oversee lenders, the PRA may be forced to implement European Union rules with which it disagrees. These include plans to cap bankers’ bonuses at twice fixed salary and maximum levels of capital for banks.

“On both issues, in terms of capital ceilings and bonus caps, the bank has fought through the government for more flexibility,” said Lindsay Thomas, a former FSA director who is now an adviser at risk management company Sustainable Risks in London. European harmonization “could be a major constraint,” he said.

‘Light Touch’

The FSA was heavily criticized by lawmakers during the financial crisis for failing to crack down on wrongdoing, including insider trading. Its “light-touch” regulation model during the boom times was widely blamed for allowing banks to take unnecessary risks. The regulator apologized for the tactic and changed its approach, with then-CEO Hector Sants warning in 2009 that people “should be frightened” of the FSA.

One area where the FSA bared its teeth was tackling insider trading. The regulator hadn’t prosecuted a single case until 2008, when it successfully took on a former general counsel of a Motorola Inc. unit.

Since then, it has increased its efficacy, going from prosecuting a dentist and his son in 2009 to targeting rings of bankers working in London’s financial district. It is currently prosecuting six people, has convicted 23 people in total and arrested eight people so far this year.

No Laughing

“For a long time, and I’m going back even before the FSA, City regulators were always being laughed at by people in the City,” said Robert Brown, a lawyer at Corker Binning in London. “I don’t think they do that anymore, especially when it comes to criminal enforcement.”

The FSA’s full range of powers came into effect in 2001, giving it oversight not only of securities dealers, banks and insurers, but also the functions of seven other bodies, covering everything from building societies to derivatives dealers. It also got the power to levy unlimited fines on a broader range of people and firms that flout U.K. trading rules.

With the changeover on April 1, the FCA and PRA will end the FSA era.

“This is what we’ve got, and you can see there are merits,” Conceicao said. “Whether it works, I think that’s more down to other factors,” such as “culture, approach and quality of actual supervision-the depth and understanding regulators have of the issues.”